Case Study: Boeing Commercial Aircraft: Comeback?

Course Instructor:
Julie Howar; Case Studies in Business
Submission Date: September 14, 2010
History & Timeline Stephanie Maenhout
Internal and External Forces Dawn Denton
Corporate Strategy Char-anna Koblick
Recommendations Tami Springer
SWOT Analysis Janine Meersman
Works Cited
Although we originally broke this into separate responsibilities, the final product
was a collaborative effort involving everyones input and equal contributions.
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BOEING CASE ANALYSIS
Boeings History and Timeline
Pacific Aero Products Company was established in Seattle in 1916 by an avid aviation
enthusiast named William Boeing. In 1917 the name was changed to Boeing Airplane Company.
They made history in 1919 when their C-700 was used to carry the first international mail
from Vancouver, B.C. to Seattle. This was certainly not the last time that Boeing would prove
themselves as pioneers in aircraft, aerospace, and military. (Boeing Heritage of History)
In 1923, they began what would become a long and profitable relationship with the U.S.
military. Boeing developed the first missile which traveled at supersonic speeds. Using a wind
tunnel, they developed the first swept-wing design aircraft, which has been used on every large
jet airplane since. The ever popular B-52 first flown in 1954, went on to break distance and
speed records, including cutting the around-the-world speed record in half and remained vital to
the U.S. Air Force until the end of the 20
th
century. (Rumerman)
The main Air Force refueling airplane, the Dash 80, was rolled out in 1956 and is still in
use today. Their first intercontinental ballistic missile was developed in 1958, was canceled in
1963, and then re-emerged in 1983 to power the Space Shuttle. (Rumerman)
By the 1960s, the aerospace division was a substantial part of their revenue and helped
put astronauts into space, on the moon, and later helped extend space exploration to Venus and
Mercury. The 1990s brought more military business with the development of the Comanche,
Osprey, and Raptor helicopters. (Rumerman)
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In the commercial industry, the most well known aircraft is Boeings 747, which was
developed in 1966. (Boeing Heritage of History) There have also been many firsts in the
commercial aircraft; wide-bodied, long-haul jet with only two engines, designed strictly on
computers, and utilization of cross-functional teams of engineers and production employees.
The 767 was the first Boeing aircraft with the majority of the work subcontracted to Japanese
manufacturers Mitsubishi, Kawasaki, and Fuji. (Hill)
In the early 1990s, Boeing explored the idea of replacing the 747 with a super-jumbo
aircraft but by 1997, they decided that the high development cost ($7 billion) and the rise of
point-to-point flights would cause the super jumbo to be unprofitable. Boeing instead decided to
focus on new versions of their existing models. (Hill)
In 2001, Boeing planned a new aircraft capable of flying close to the speed of sound,
carrying 250 passengers, and having a 9,000 mile range but was canceled in 2002 during the
post 9/11 airline recession. Instead, they announced a more traditional aircraft with composite
technology which would reduce operating costs. (Hill)
In 2004, the 7E7 aircraft was launched with the largest launch order every received by
Boeing: fifty aircraft worth $6 billion by Nippon Airlines of Japan. The 7E7 outdistanced any
of Airbuss aircraft with its range of 8,500 miles and 200-300 passengers. The fuselage was
made out of composites, which made the aircraft lighter and resulted in the use of 20% less
fuel than other aircraft of similar size. Cost savings were realized during production as well by
outsourcing the largest amount of work than on any previous Boeing aircraft and the use of new
innovations in assembly. By 2006, Boeing had already reached the break-even point for the 7E7.
(Hill)
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With revenue from commercial aerospace estimated between 40 and 60 percent, Boeing
relocated its corporate headquarters in 2001 to Chicago in an attempt to pull away from the
commercial aerospace business which was located in Seattle. (Hill)
Over their history Boeing has acquired numerous companies including Vertol Aircraft
Corporation in 1960 (builder of the Dogship and Flying Banana) and Hughes Space
and Communications (satellite builder). (Rumerman) They also merged with Rockwell
Internationals aerospace and defense units in 1996 and McDonnell Douglas in 1997. (Hill)
In the late 1990s, Boeing made an almost fatal corporate decision when they cut prices
to gain market share from their primary competitor, Airbus. Boeing doubled their production
schedules resulting in a need to hire 41,000 workers. Unfortunately, they had recruited workers
from their suppliers, so then their suppliers could no longer meet their shipment requirements.
Boeing had to shut down production lines to allow workers to catch up. Penalties and higher
costs caused the company to report very little profit from the mid-1990s order boom. The
company committed itself to updating its production system and fired the head of their
commercial aerospace business. (Hill)
After that Airbus incident, Boeing decided to apply moonshine creative philosophy and
lean production to streamline their production lines. The moonshine teams eliminated the huge
machinery and replaced them with smaller, movable machinery. These changes, in combination
with a new moving assembly line, reduced production times significantly. By implementing a
just-in-time inventory system, Boeing was able to reduce their need for storage space to store
parts for future production runs. (Hill)
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Throughout the history of the company, Boeing has established itself as an innovative
and creative company which fits into their vision to be a global enterprise for aerospace
leadership.
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Boeings Internal Strengths and Weaknesses
Time has revealed the many strengths and weaknesses Boeing has faced internally. The
company has continued to grow strong by utilizing their strengths and overcoming many of
their weaknesses. For example, anticipating a limited market for commercial airlines as well
the high cost of research and development, Boeing partnered with the military. This partnership
gave them financial resources, a larger market, a more diverse product line, and enabled them to
collaborate with military researchers in development and research.
Manufacturing competence is an area of strength which improved through a period
of weakness. A strategic plan for gaining more of the market share left Boeing struggling to
meet deadlines and lack of scenario planning caused major disruptions in production lines. A
weakness revealed led to Boeing seeking out new innovative ways of handling production
which resulted in more efficiency utilizing just-in-time inventory, lean production practices,
moonshine philosophy, and a lower break-even point.
Through the years, Boeings ability to manage strategic change has been a strength.
When faced with the decision whether to replace the 747 with a more advanced larger airplane
as their competition, Airbus, was doing, Boeing made a strategic decision to focus their efforts
on meeting the growing point-to-point market. Boeing believes large capacity aircrafts flying
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to big, overcrowded, dispersal hubs are pass. Travelers want speed, frequency, and direct
connections. (Verghese, 2010) The decision to gamble on point-to-point may turn out to be
a weakness for Boeing unless they find a way to match the environmental advantages Airbus has
over them with the quieter Airbus 380. The US Environmental Protection Agency has listed
jet noise as the second most important problem to the environment. (Verghese, 2010) Boeings
strength in R&D, as well as their ability to develop strategic partnerships, may help Boeing turn
this weakness into a strength. Their partnership with the University of Notre Dames Institute
for Flow Physics and Control is focused on developing airplanes more environmentally friendly
through lower emissions, less fuel consumption, and less noise pollution.
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The Nature of the External Environment Surrounding Boeing
One of the largest external environmental factors for any company is competition and
Boeing is no exception. Airbus is their major competitor, and using Porters Five Forces, it is
evident how the external environment had shaped their competition.
The nature of manufacturing airplanes is such that the risk of entry by potential
competitors is very small. The large start-up cost, high break-even point, and long turn-
around time are major barriers to entry and make the airline manufacturing business a highly
consolidated industry with a very small oligopoly.
Bargaining power of suppliers is low due to Boeings manufacturing changes and
very specialized product. Most of the suppliers for airplanes make parts which are used only,
or mostly, in the production of airplanes. It would be costly for a supplier to switch from
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manufacturing parts for an airplane to manufacturing for another industry. Since there are only
two major manufacturers of airplanes, a suppliers power is limited. The supplier either sells to
Boeing and Airbus or switches to another industry.
The power of the buyer, on the other hand, is great. A very small number of airplanes
are sold each year, so having a large share of the market is important. The high break-even point
puts even more pressure on manufacturers of airplanes to gain as much of the market share as
possible. Both these factors give the buyer a lot of power. On the surface, it would seem that
there are few substitutes for an airplane; however, when considering the transportation industry
as a whole, it may be possible to identify alternative means of transportation that are suitable.
Perhaps as the energy crisis grows, as well as environmental concerns, trains; semi trucks; and
low-fuel consumption buses may prove to be a substitute for domestic travel in the future.
Lastly we must consider the intensity of the rivalry between Airbus and Boeing. Even
though three of the five forces are low, the strength of the rivalry between Boeing and Airbus is
great enough that the competition should be considered a threat. Even so, competition is not the
only external environment to consider. Other external forces have a direct impact on the industry
as well. Political/legal, demographic, global, macroeconomic, social, and technological forces
each play a role in creating the external environment in which Boeing and Airbus must compete
with each other. Two of the main external forces are political/legal and social forces.
The extremely high R+D cost of manufacturing airplanes, added to the high investment
of time needed to break even, makes the ability to finance a big factor in gaining a competitive
advantage. In 1992, a bilateral agreement between the US and EU on Trade in Large Civil
Aircraft was established with the goal of monitoring and controlling the governments
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involvement in financing airplane development in order to insure that competition between
Airbus and Boeing was not hindered by lack of funds for research and development. Since
1992, government loans have covered up to one-third of the development cost of new planes
for Airbus. (Matlack, 2004) A trade dispute is currently being debated by the WTO and the
outcome will likely have a huge impact on both Airbus and Boeing.
The second external environment force, which will play a large role in influencing
competitive advantage between Airbus and Boeing in the coming years, is social forces.
Airplanes emit a large amount of emissions, contribute to noise pollution, and add to the energy
crisis with their large fuel consumption. The growing concern for the environment, as well
as government regulations geared toward protecting the environment, are sure to dictate the
direction Boeing and Airbus go in the future. The company which considers environmental
concerns in their strategic plan and focuses R+D in areas which are more environmentally
friendly will have a competitive advantage.
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Corporate Strategy at Boeing
Boeing products and services include commercial and military aircraft, defense systems,
and communication systems. To make the world a better place, is Boeings underlying
strategy in everything they do. Their vision statement is: People working together as a global
enterprise for aerospace leadership. They are dedicated to making this happen by running
healthy core businesses, leveraging their strengths into new products and services, and opening
new frontiers. (Boeing.com)
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Boeing also recognizes the serious challenges facing our eco-system and is committed
to improving the environmental performance of its operations, products, and services.
Their environmental policy strives to conduct operations in compliance with environmental
regulations; prevent pollution by conserving energy and resources, recycling, reducing waste,
and pursuing other reduction strategies; continually improving environmental management
systems; and working together with stakeholders on activities that promote environmental
protection. Boeing believes that climate change is a serious environmental challenge that
requires credible action; therefore, they are committed to reducing greenhouse gas emissions
from their facilities and products. They plan to accomplish this by pioneering new technology
to improve the global transportation system; increasing research to improve efficiencies
throughout the system: air and ground operations, in-service fleet environmental performance,
and introduction of sustainable advanced-generation biofuels; accelerating the adoption of
environmentally progressive products and services; and by reducing carbon intensity of air
transportation by reducing CO
2
emissions 15 percent with each new generation of commercial
aircraft. (Boeing.com)
The Boeing Management Model includes charting the course, setting high expectations,
inspiring others to find a way, living Boeing values, and delivering results. Following these
guidelines would bring positive results to all their stakeholders, which include the employees,
customers, shareholders, and communities. Boeing promises that their greatest contribution in
the future will continue to be through innovation--and they will remain committed to improving
technologies for sustainable, renewable energy systems. (Boeing.com)
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Recommendations for the Future
If Boeing wishes to remain a viable airplane manufacturer, it needs to turn away from
the temptation of short term profits and invest enormously in risky new airplane developments.
It needs to come up with a plane that is tangibly different to all other planes in the sky today.
Its true that Boeing has a history of success in innovation but they seem to have lost steam in
that arena more recently. The 707 and the 747 were revolutionary planes, and the Airbus A380
(their competitor) is also revolutionary. Perhaps a supersonic plane would fit the bill, since these
are being developed currently by the Japanese. There is a definite need for speed on long-haul
journeys.
A revolutionary plane could be one that offers massive new economies. Such a plane
would almost certainly not be a traditional long narrow fuselage with wings and tail, but might
instead build on some of the 'flying wing' research that was first done in the 1920s, with a
blended wing plane (the B-47 bomber) appearing in the late 1940s, and which most recently can
be seen in the form of the B-2 bomber. Boeing has done extensive studies of such technologies,
and in 2002 released information on a design that it had created with NASA's assistance.
This 'Blended Wing Body' plane (BWB) would carry 480 passengers. It would use an incredible
32% less fuel per passenger mile than an A380, be 19% lighter (cheaper to build) and require
19% less engine power, meaning cheaper engines and less pollution. Almost certainly, the extra
development to evolve this from a prototype concept to a production model would see even
greater savings and efficiencies. Boeing has begun developing this model for the military to be
deployed by 2022 and commercial planes by 2030, but this is far too late. Another revolutionary
concept is the 'Wing-in-ground' type vehicle which is a cross between a plane and a hovercraft.
It uses the 'ground effect' to provide a very efficient lift at a very low altitude - perhaps no more
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than 10 feet. These vehicles would travel on the water at speeds of about 150 mph and provide
a very fast and efficient means of transporting freight and possibly passengers too. This plane is
currently in development in South Korea. In 2005, it was announced that these planes could be
placed into production as early as 2010. (thetravelinsider.com)
Like the dinosaurs, it seems that Boeing is headed on a path that leads to extinction if it
doesnt start taking more financial risks and stop focusing on short-term profits. Boeings future
success depends on their willingness to move beyond conventional wisdom and think outside
the box. In the past, when confronted with a problem, Boeing would see it as a challenge and
a reason to try harder and triumph. Although they have good employee programs, efficient
production processes, corporate responsibility, and environmental policies in place, until
Boeing reverses this situation and becomes a bold pioneering leader again, it will face continued
declining market share. (thetravelinsider.com)
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Works Cited
Where is Boeing Going? The Travel Insider, http://thetravelinsider.info/2003/boeing4.htm,
July 14, 2010.
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APPENDIX
Boeing SWOT-Analysis Up To 2006
I
n
t
e
r
n
a
l
STRENGTHS
60+ years in business
Diverse product line
747 name recognition
Military and commercial passenger aircraft
Smaller planes for point-to-point flights
Just-in-time inventory
Lean production practices
Moonshine teams improved efficiency/less waste
Moving production line cut production time
Digital assembly/innovation
CEO, McNerney, from GE believed to favor lean
production, Six Sigma, global sourcing
Boeing good name / reputation
747-8 programlonger range flights and composite
construction
Major suppliers sharing development costs of 787/
outsourcing
Lower breakeven point
787 use less fuel
Well suited for long-haul, point-to-point flights
Focus on point-to-point aircraft
Merger with McDonnell Douglas transformed Boeing into a
broad-based aerospace business
High barrier to entryonly one competitor
WEAKNESSES
Recent turnover of CEOs and upper level executives
Scandals
Suppliers behind schedule designing components
Complex coordination of diverse suppliers
Focus on smaller aircraft for point-to-point flights
High R&D and tooling costs
Long development time
Low demand for product
Long time to reach breakeven point to realize profits
E
x
t
e
r
n
a
l
OPPORTUNITIES
Production delay Airbus A380; orders stalled
UPS considering order of 747-8 from Boeing rather than
A380 from Airbus
With rising fuel costs, 787 fuel efficiency works in their
favor
Size of A380 causing airports to widen taxiways
Airlines to offer more frequent nonstop flights instead of
hub-to-hub flights on larger aircraft
Liberalization of regulations governing airline routes
allowing more direct flights between city pairs.
Point-to-point flights reduce need for smaller commuter
planes
Improved communication with suppliers
THREATS
Airbus A350 or A350 XWB
Airbus A380 rival Boeings 747
Airbus new management
Trade dispute
More hub-to-hub flights on larger aircraft
Tight regulations not allowing more direct flights
between city pairs; thus need for larger aircraft.
Fuel costs
Terrorist attacks
Economy
Higher emissions point-to-point flights
No additional funds from government
Outsourcing
Small airports closing or struggling to operate
Airline bankruptcies
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GROUP PARTICIPATION
History & Timeline Stephanie Maenhout
Internal and External Forces Dawn Denton
Corporate Strategy Char Koblick
Recommendations Tami Springer
SWOT Analysis Janine Meersman
Editing Tami Springer and Janine Meersman
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